In this paper, there are duopoly firms on the market. The network sizes of two firms are asymmetric. Under the Compatibility that the market gave, two firms do price competition, firms achieve the optimal market share, the optimal price and profits. We use the method of Palma and Leruth (1996) to measure the size of network externalities. Consumers must choose one of two consumer products. And discuss if the compatibility between two products required to enhance. What will affect the market share , price and profit of firms?
There are some different points that this study compared with previous literature：First, the compatibility between the product manufacturer is partial compatibility ; second, two firms are price competition.; third, the vertical difference between the products, meaning products are significant differences between the quality; fourth, consumer preferences are all different, that is, consumers like the product has a different degree. Based on the above conditions , we tried to achieve the optimal market share, optimal price and profit of two firms. And what will the firms do if the compatibility between them is required to enhance.
In conclusion, we found when the compatibility of products between manufacturers are required to increase, it will cause the larger network firms to reduce their market share, lower prices and reduced profits. Compared to the larger network firm, the market share of smaller companies will increase, higher prices and thus increase profits. Because of this conclusion, we can determine that the larger the network will be unwilling to increase compatibility of manufacturers; smaller companies will find ways to improve compatibility level. Reasons for this result, we sorted out the two: first, the competitive effects :this make the price competition between manufacturers will become more intense; second, the network effect : it lead the smaller firms to increase its number of customers, then makes the other manufacturer’s market share decline. And then the consumer surplus will decrease, the original advantage fall away. The larger network company has to cut price to attract the customers.